Bangladesh Country Report by Rabobank

Bangladesh remains one of the poorest countries in the world despite robust growth rates. The economy of Bangladesh has proven resilient to the adverse effects of the global financial crisis as it is relatively isolated from the world economy. GDP is estimated to have grown 6% yoy in 2010 and 6% growth is also expected in 2011. Even so, economic development is hampered by flooding, power outages and a terrible infrastructure. Embedded and widespread corruption hinder the business environment. The political landscape is unstable as the ruling and the main opposition party share a historical animosity, severely obstructing any progress on the policy agenda. The fiscal position is weak and inflation targeting is complicated by conflicting central bank objectives. The social situation is tense and marked by violent mass protests. The external position did improve, as robust remittances inflows have significantly boosted the stock of FX-reserves.

Bangladesh remains one of the poorest countries in the world despite robust growth rates. The economy of Bangladesh has proven resilient to the adverse effects of the global financial crisis as it is relatively isolated from the world economy. GDP is estimated to have grown 6% yoy in 2010 and 6% growth is also expected in 2011. Even so, economic development is hampered by flooding, power outages and a terrible infrastructure. Embedded and widespread corruption hinder the business environment. The political landscape is unstable as the ruling and the main opposition party share a historical animosity, severely obstructing any progress on the policy agenda. The fiscal position is weak and inflation targeting is complicated by conflicting central bank objectives. The social situation is tense and marked by violent mass protests. The external position did improve, as robust remittances inflows have significantly boosted the stock of FX-reserves.

Bangladesh remains one of the poorest countries in the world despite robust growth rates. Theeconomy of Bangladesh has proven resilient to the adverse effects of the global financial crisis as itis relatively isolated from the world economy. GDP is estimated to have grown 6% yoy in 2010 and6% growth is also expected in 2011. Even so, economic development is hampered by flooding,power outages and a terrible infrastructure. Embedded and widespread corruption hinder thebusiness environment. The political landscape is unstable as the ruling and the main oppositionparty share a historical animosity, severely obstructing any progress on the policy agenda. Thefiscal position is weak and inflation targeting is complicated by conflicting central bank objectives.The social situation is tense and marked by violent mass protests. The external position didimprove, as robust remittances inflows have significantly boosted the stock of FX-reserves.

When the Europeans set up trading posts around the area of Bangladesh, the British dominated theregion. As such, Bangladesh was part of British India until the region was split up into India andPakistan in 1947. Pakistan was comprised of West Pakistan (current Pakistan) and East Bengal(current Bangladesh. This awkward arrangement of a two-part country with its territorial units1,600 km apart left the Bengalis marginalized and dissatisfied. In 1971, East Bengal separatedfrom Pakistan and was renamed Bangladesh. Ever since, economic development has been veryslow, hampered by political turmoil. It is one of the poorest countries in the world with nominalGDP per head of only USD 1,483 and 36% of the population living below the poverty line of USD 1per day. The low level of human development is also reflected in the UN’s human developmentindex, which ranks Bangladesh 146

th

out of 182 countries.Economic development is also hampered by a high vulnerability to inundations. Each year, about athird of the country is flooded during the annual monsoon rains. This severely affects theagricultural sector, washing away crops. While the agricultural sector is not especially important interms of economic size, since it accounts only for 18% of GDP, it employs 45% of the country’slabor force. The industrial sector contributes 29% to GDP and within this sector the textiles andgarment sector is a key growth driver. Unfortunately, the industrial sector is plagued by the terribleinfrastructure and frequent power outages, which have become structural impediments to a higherlevel of economic growth. The large services sector, which contributes 52% to GDP, is not leftunaffected by the power outages. Furthermore, the level of corruption is very high and widespread,affecting the overall business environment.Even so, Bangladesh has been able to post surprisingly robust and stable rates of economic

expansion of the last couple of years. Real GDP growth averaged a decent 5.8% annually in thepast ten years. Even during the global economic slowdown in 2008-09, the country’s economygrew by 6.2% and 5.7% yoy respectively. This robustness can be attributed to Bangladesh’ relatively low level of integration with the world economy. It does not have developed financialmarkets exposing it to international capital flows. Also, the banking system has not been exposedto US subprime loans or other western mortgage products. The banking sector is healthy accordingto the 2010 Financial System Stability Assessment of the IMF. It does note that state-owned banksremain in a financially weak condition, but the banking sector as a whole only poses a moderatecontingent liability.Another indicator pointing to low integration with the world economy is that the openness of theeconomy only amounts to 43%, which is relatively low. Exports are highly undiversified as textilesand garment products make up 80% of total exports. As Bangladesh’ main export partners are theUS and Western Europe, this makes export revenues highly susceptible to the economic cycle of developed countries. For its imports, Bangladesh mostly depends on India and China. It mainlyimports capital goods, textiles, petroleum and metals.The textiles and garment sector is a main driver of economic growth along with the agriculturalsector and remittances inflows. Remittances from Bangladeshi workers overseas have proven to bevery robust in 2008 and 2009, supporting household consumption. Remittances have grown fromUSD 1.8bn in 2001 to an estimated USD 11bn in 2010, equivalent to 11% of GDP.Going forward, the outlook is positive as the economic recovery picks up in the west, albeit veryslowly. Domestically, the agricultural sector is expected to grow on the back of supportivegovernment policies, but devastating floods remain a high risk. Overall, the economy is forecastedto grow by 6% in 2011.

Political and social situation

Since gaining independence in 1971, Bangladesh has developed a functioning parliamentarydemocracy amid episodes of military rule. The latest such event was between 2006 and 2008,when the country was ruled by a military sponsored caretaker government. While democracyreturned with the general elections in January 2009, the political situation remains tense as the twomain parties share a historical animosity. The Awami League (AL), led by Prime Minister Hasina, isthe ruling party. The AL acquired 230 out of 300 seats in parliament, giving it a strong mandate asit has surpassed the two-thirds majority in parliament needed to amend the constitutionunchallenged. This was a crushing blow to the main opposition party, the Bangladesh NationalistParty (BNP). The hostility between these parties has resulted in distractions from economic policy,hampering of legislative efficiency and economic disruption through politically-motivated strikesand blockades by BNP supporters. The BNP and other leftist parties have strengthened recently,reflected by the BNP’s victory in the municipal elections in the important port city of Chittagong in